HEALTH INSURANCE EXCHANGES AND THE AFFORDABLE CARE ACT: KEY POLICY ISSUES. Timothy Stoltzfus Jost Washington and Lee University School of Law

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1 HEALTH INSURANCE EXCHANGES AND THE AFFORDABLE CARE ACT: KEY POLICY ISSUES Timothy Stoltzfus Jost Washington and Lee University School of Law July 2010 ABSTRACT: Health insurance exchanges are the centerpiece of the private health insurance reforms of the Patient Protection and Affordable Care Act of 2010 (ACA). If they function as planned, these exchanges will expand health insurance coverage, improve the quality of such coverage and perhaps of health care itself, and reduce costs. Previous attempts at creating health insurance exchanges, however, produced only mixed results. This report identifies the earlier attempts problems, enumerates the key issues that are critical for overcoming those problems, analyzes in detail the ACA s provisions addressing these issues, and discusses further policy options. Support for this research was provided by The Commonwealth Fund. The views presented here are those of the author and not necessarily those of The Commonwealth Fund or its directors, officers, or staff. To learn more about new Commonwealth Fund publications when they become available, visit the Fund s Web site and register to receive alerts. Commonwealth Fund pub. no

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3 CONTENTS About the Author...iv Acknowledgments...iv Executive Summary...v Introduction...1 Key Issues that the Implementation of Exchanges Must Address...3 Adverse Selection...3 Numbers of Participants...9 Market Coverage and Structure...10 Choice Without Complexity...12 Transparency and Disclosure...14 Competition...15 Administrative Costs...17 Market or Regulator?...19 Administering Subsidies and Mandates...21 State, Regional, or National Exchanges?...22 Governance...24 Relationship with Employers...26 Cost Control...28 Summary and Conclusions...30 Notes...32 LIST OF EXHIBITS Exhibit 1 Exhibit 2 Exhibit 3 Exhibit 4 Exchange Implementation Timeline Essential Benefit Package Requirements Under the Affordable Care Act Premium Subsidies Under the Affordable Care Act Cost-Sharing Subsidies and Limits Under the Affordable Care Act iii

4 ABOUT THE AUTHOR Timothy Stoltzfus Jost, J.D., holds the Robert L. Willett Family Professorship of Law at the Washington and Lee University School of Law. He is a coauthor of the casebook Health Law, used widely throughout the United States in teaching health law and now in its sixth edition. He is also the author of the books Health Care at Risk, A Critique of the Consumer-Driven Movement, Health Care Coverage Determinations: An International Comparative Study, Readings in Comparative Health Law and Bioethics, and numerous articles and book chapters on health care regulation and comparative health law and policy. He has written on legal issues in health care reform for a number of other organizations including the National Academy of Public Administration and National Academy of Social Insurance, the Fresh Thinking Project, the Urban Institute and New America Foundation, and AcademyHealth. He blogs regularly about health reform implementation at ACKNOWLEDGMENTS The author wishes to thank Mark Hall and Kathy Swartz for their helpful comments on earlier drafts, and David Riemer, William Kramer, and Alain Enthoven for the benefit of their thoughts on exchanges. Editorial support was provided by Steven J. Marcus. iv

5 EXECUTIVE SUMMARY Health insurance exchanges are the centerpiece of the private health insurance reforms of the Affordable Care Act of 2010 (ACA). If they function as planned, these exchanges will expand health insurance coverage, improve the quality of such coverage and perhaps of health care itself, and reduce costs. Previous attempts at creating health insurance exchanges, however, enjoyed only mixed results. As part of successfully implementing the new exchanges, the U.S. Department of Health and Human Services (HHS) and the states must address issues that undermined the earlier attempts. These issues are: Adverse selection. It is absolutely necessary that exchanges be protected against adverse selection (the disproportionate purchase of health insurance by the least healthy individuals) especially because, under the ACA, small-group and nongroup insurance options remain available outside the exchanges. However, a number of provisions of the ACA level the playing field inside and outside the exchange, and weaken incentives for adverse selection. These protections can also be enhanced by the states. Numbers of participants. Exchanges that include large numbers of enrollees, as well as a high percentage of the total number of enrollees who are participating in the entire insurance market, offer greater market power, economies of scale, more stable risk pools, and stronger protection against adverse selection. The ACA offers opportunities for expanding risk pools, which should be fully exploited. Market coverage and structure. The ACA permits both the combination and separation of small-group and nongroup risk pools and exchanges. It also allows the creation of regional or subsidiary exchanges. The advantages and disadvantages of pursuing these options must be carefully weighed. Choice without complexity. The exchange model created by the ACA presents consumers with structured choices. An important implementation decision will be whether to further structure choices or, alternatively, to offer maximum choice and flexibility within the constraints of the ACA. Transparency and disclosure. The ACA contains numerous provisions designed to maximize transparency and disclosure. Putting these requirements into operation will be one of the Act s most important implementation tasks. v

6 Competition. The exchanges are intended to increase competition among insurers and focus that competition on value and price. A number of provisions of the ACA should help to facilitate this objective. Administrative costs. The ACA requires exchanges to fulfill a number of administrative functions that will add to their costs. Exchanges must find ways to reduce such internal costs, as well as the administrative costs to insurers and employers, if they are to offer better value to enrollees. Market or regulator? The ACA delegates to exchanges a number of regulatory responsibilities. Exchanges must certify health plans for participation and can exercise regulatory authority through this power. An important implementation choice will be whether exchanges should, on the one hand, maximize plan participation by minimizing certification requirements or, on the other hand, use their certification authority to limit exchange participation to high-value plans. Administering subsidies and mandates. The exchanges will play important roles in establishing insurance affordability, administering cost-sharing subsidies, and serving as a gateway to other public programs. It is particularly important that exchanges coordinate seamlessly with other public programs because participants will often move back and forth between an exchange, Medicaid, and the Children's Health Insurance Program (CHIP). State, regional, or national exchanges? Although the ACA favors the creation of state exchanges, it also confers authority to create a federal exchange as well as a multistate insurance program, and it provides for the possibility of regional exchanges. Important policy choices will need to be made concerning which avenues particular states should pursue and how the federal government should react to state action or inaction. Governance. The ACA provides very little guidance as to how exchanges should be governed. HHS and the states must carefully consider how the entities that govern exchanges should be structured and how they relate to other state and to federal institutions. Relationships with employers. Although exchanges must be employer-friendly if they are to succeed, the ACA offers little guidance in this regard. Such relationships nevertheless need to be a major focus of implementation efforts. Cost control. Exchanges have been sold as a mechanism for moderating the growth of health insurance costs. Achieving this objective will only be possible if exchanges are implemented so as to maximize competition, choice, and participation and to minimize administrative cost and adverse selection. vi

7 HEALTH INSURANCE EXCHANGES AND THE AFFORDABLE CARE ACT: KEY POLICY ISSUES INTRODUCTION Health insurance exchanges are the centerpiece of the private health insurance reforms of the Patient Protection and Affordable Care Act of 2010 (ACA). It is expected that once state-level exchanges become fully operational in 2014 they will play a major role in the purchase and sale of health insurance (Exhibit 1). They will supervise insurance-plan marketing and competition in the small-group and nongroup markets; oversee the standardization of plan benefits and cost-sharing; bear some responsibility for restraining premium growth; and administer the distribution of tax credits for lower- and middleincome people who lack access to employer-sponsored coverage and who earn too much to be eligible for Medicaid. If the exchanges function as planned, they will expand coverage, improve the quality of health insurance coverage perhaps even of health care itself and reduce costs. Over the next four years, federal and state implementation of the ACA will be centered on getting the health insurance exchanges up and running. It will be very important that the exchange implementation process be sound, and that we learn from 1

8 earlier mistakes and build on existing successes. Congress has from time to time implemented an innovation that one or more states have tried successfully Medicare diagnostic-related groups payment is one such example. But while a few state-level exchanges have been quite successful, many others have failed. Thus, Congress has built its reform of private health insurance markets largely on what has to date been an experiment with decidedly mixed results. The health insurance exchange is not a new idea. It is grounded in the concept of managed competition developed by economist Alain Enthoven and others in the late 1980s. 1 Exchanges have been around for nearly two decades in various guises as purchasing cooperatives, health alliances, and connectors among states and private entities. Health alliances also were at the center of the failed Clinton Health Security Act in the early 1990s. 2 The best of the exchange-like programs including the Federal Employees Health Benefits Program (FEHBP), the California Public Employees Retirement System, the Dane County (Wisconsin) Public Employees Program, the Massachusetts Connector, and Connecticut Business and Industry Association s Health Connections exchange have enjoyed success in increasing choice of plans and moderating cost growth. Many efforts at creating exchanges, however including exchanges in California, Texas, Florida, Colorado, North Carolina, and elsewhere have failed, sometimes after enjoying some initial success. 3 The theory behind exchanges appears to be sound. The large employer group health insurance market is generally viewed as successful because large groups can create sizeable and stable risk pools, minimize adverse selection (by covering all employees who do not opt out), deal with insurers from a position of bargaining strength or insure themselves, and keep administrative costs low. Also, large employers can offer their employees a choice of benefit plans, enabling them to pick the plan that best matches their needs and resources. An exchange, in theory at least, could offer these advantages to the small employer group and nongroup market, thereby stabilizing these markets, lowering transaction costs, increasing competition, and widening choice. For exchanges to succeed, however, they will have to avoid the pitfalls of earlier efforts that failed. The ACA goes to some length toward achieving this goal, though more will have to be done as implementation proceeds. The burden of creating successful exchanges will first fall to the federal government. The U.S. Department of Health and Human Services (HHS) in addition to drafting regulations and issuing guidance (in consultation with the National Association of Insurance Commissioners and other stakeholders) that help operationalize the 2

9 exchange concept has the responsibility under the ACA to administer the subsidies granted to the states to help them begin exchange implementation, monitor that implementation, and establish a federal exchange alternative for states that elect not to implement their own exchanges or that fail to effectively do so. In the end, however, the ACA leaves the task of implementing the exchanges to the states, which will have the responsibility of actually making them work. This report, the first of a series on health insurance exchanges, examines 13 issues that must be resolved for the exchanges to succeed. In each of the subsections that follow we first describe the issue and then analyze in some detail how the ACA addresses it. KEY ISSUES THAT THE IMPLEMENTATION OF EXCHANGES MUST ADDRESS Adverse Selection The Issue The single most important reason why some exchanges have not succeeded in the past is that they became the victims of adverse selection they were unable to capture a large enough share of the healthy participants in the insurance market. 4 In effect, these exchanges attempted to offer better coverage, or more affordable coverage, to too many individuals or groups with unfavorable risk profiles and were unable to attract enough healthy enrollees. 5 Indeed, as long as small-group or nongroup coverage is easily available outside the exchange, the potential exists for healthy individuals and groups to find policies cheaper than those available through the exchange. A particular concern is the possibility that employer-sponsored groups can self-insure (thus escaping state regulation) as long as their employees are healthy, only to turn to the exchange once group members health deteriorates. In this way, an exchange can essentially turn into a high-risk pool, with its coverage becoming unaffordable and its enrollees becoming very unattractive to insurers. The most successful exchanges have featured a large and diverse population (such as FEHBP), have barred outside competition, or have made available significant advantages only to individuals participating in the exchange (for example, in Massachusetts, premium subsidies are available only through the state s Health Connector). 6 The ACA The ACA does not eliminate the potential for adverse selection, as it permits both an individual and group health insurance market to continue to exist outside the exchange. 7 3

10 People cannot be restricted to insurance plans offered within the exchange. Lower-risk individuals in particular can go outside the exchange, without penalty, if they find less expensive coverage there. 8 The ACA also provides for grandfathered plans to exist outside the exchange. 9 Many of the provisions of the ACA will, however, tend to discourage adverse selection against the exchange. First, the Internal Revenue Code, as amended by the ACA, requires individuals to have minimum essential coverage. 10 Individuals who do not have employer-based or public insurance will be required to purchase an insurance plan or pay a penalty. By encouraging individuals to at least purchase insurance somewhere, healthy individuals will be dissuaded from staying out of the insurance market altogether. Second, most of the insurance reforms imposed by the ACA apply both within and outside the exchange. These provisions, which might encourage adverse selection if they applied only within the exchange, include: Banning lifetime or annual dollar limits on coverage; 11 Requiring plans to permit members participation in approved clinical trials (relative to the prevention, detection, or treatment of cancer or other lifethreatening diseases) and to cover the routine patient costs of such participation; 12 Permitting premium variation based only on age (3:1), geographic region, individual or family coverage, or tobacco use (1.5:1); and prohibiting rating based on health status; 13 Guaranteeing the issuing and renewability of coverage; 14 Prohibiting preexisting-condition exclusions; 15 and Prohibiting waiting periods of longer than 90 days. 16 Third, individual and small-group plans, both within and outside the exchange, must cover defined essential health benefits (Exhibit 2), 17 with a scope equal to that of the typical employer plan. 18 State benefit requirements also continue to apply outside as well as inside the exchange. 19 Beginning in 2014, out-of-pocket expenditures both inside and outside cannot exceed those allowed for high-deductible health plans linked to health savings accounts. 20 Deductibles in the small-group market cannot exceed $2,000 for individuals and $4,000 for families. Plans outside the exchange will be limited, therefore, in their ability to attract healthy individuals by offering higher cost-sharing or by excluding benefits that might be more attractive to high-cost individuals. Direct 4

11 marketing of insurance plans through the exchange, to the extent it occurs, also will reduce the ability of agents and brokers to engage in street underwriting that is, to informally steer low-risk enrollees away from the exchange, and high-risk enrollees into the exchange, through marketing practices. 21 Fourth, aside from their dealings with enrollees in grandfathered plans, health insurance issuers must treat all individual enrollees in their plans as a single pool and all enrollees in the small-group market as another single pool; or, if the state elects, treat members of both pools as one single pool. 22 Issuers of qualified health plans must agree to charge the same premium rate for a qualified health plan whether it is inside and outside the exchange. 23 Fifth, the ACA includes three risk-adjustment programs two transitional and one permanent that should reduce adverse selection against the exchange. 24 If plans outside the exchange attract a significantly healthier population than plans within the exchange, the former group will need to compensate the latter. The first risk-adjustment program, a permanent one to be administered by the states, 25 covers health plans inside and outside the exchange, but not self-insured or grandfathered plans. In this program the state will assess plans and insurers with low-risk enrollees and make payments to plans and insurers with high-risk enrollees. Second, the bill includes a transitional reinsurance program to be implemented for 36 months (from 2014 to 2016) by the states under 5

12 contracts with private reinsurers. 26 Finally, during the period a risk-corridor program also would be available for qualified health plans in the individual and smallgroup market. 27 The transitional reinsurance program is likely to prove very important for smoothing the introduction of the exchanges, which are likely to pick up most of the participants in the federal high-risk pool when it terminates at the end of States may terminate their own high-risk pool programs, and companies may terminate or cut back on early-retirement coverage, as the exchanges become available. Because individual mandate penalties do not fully phase in until 2017, unhealthy individuals may be overrepresented in the exchanges for the first few years. 29 The reinsurance program will help to ease this transition. The permanent risk-adjustment program also will be essential, as it should deter risk selection against the exchange on a long-term basis. Perhaps the most important protection that the exchanges will have from adverse selection, however, is that the ACA s premium-assistance credits and cost-sharing reduction payments will be accessible only to individuals enrolled in health plans through exchanges. 30 These subsidies, for households with incomes of up to 400 percent of the poverty level, are expected to cover 19 million Americans (Exhibit 3). 31 The subsidies become available once a family has spent a percentage of its income on health insurance premiums. For example, a qualifying family would only receive assistance once it had spent 9.5 percent of its household income. At this level, a young healthy family might find it less expensive to purchase the minimum essential coverage outside the exchange, as opposed to purchasing a subsidized plan within the exchange. At lower income levels, however, the subsidies are much more substantial. It is likely that most persons eligible for subsidies will remain within the exchange. 6

13 Tax credits also will be available to small employers through the exchange, though only for the first two years that an employer offers insurance through the exchange. 32 This provision, it is hoped, will encourage employers to purchase health insurance for their employees through the exchange. Finally, the ACA requires states that mandate the coverage of certain benefits (which are not part of the federal essential benefits package) to cover the cost of those added benefits only if they are provided by qualified health plans. This also should encourage the purchase of qualified plans through the exchange. 33 The provisions of the ACA, however, do not eliminate the possibility of adverse selection against the exchange. In the first place, only qualified health plans can be sold within the exchange. These qualified health plans must comply with all of the requirements in the ACA that apply to health plans generally, including covering essential benefits, but the exchange s plans also must comply with additional requirements that might render them more expensive than plans outside the exchange. This, in turn, could make the non-exchange plans more attractive to healthier individuals, 34 and also could make the marketing of plans through the exchange less attractive to insurers, thereby contributing to adverse selection. Health insurers may market qualified health plans both inside and outside the exchange, and they must sell gold- and silver-level coverage through the exchange before 7

14 they can sell other levels of coverage there. Insurers, however, do not need to participate in the exchange if they choose not to. They can remain outside the exchange, selling bronze-level high-cost-sharing plans to healthy enrollees or catastrophic plans to people under 30 or to persons who cannot find affordable policies. 35 This leaves open the possibility for healthy individuals or small employers to purchase minimum coverage outside the exchange, thereby threatening significant adverse selection against it. Selfinsured plans are subject to even less rigorous requirements under the ACA, and they might offer coverage that is substantially less protective, and less costly, than exchange coverage. 36 Some adverse selection against the exchange, therefore, is likely. Although the ACA does not allow the federal government to require individuals or employees to purchase insurance through the exchange, it doesn t preclude the states from imposing additional requirements to discourage adverse selection. The ACA only preempts state laws that would prevent the application of the ACA, and state laws limiting or tightly regulating the sale of insurance outside the exchange would not violate this principle. 37 The only federal constraint on state regulation of the health insurance market is that they cannot, because of the Employee Retirement Income Security Act (ERISA), regulate self-insured plans. States could, for example, adopt laws that: prohibit insurers from selling insurance outside the exchange; require insurers that sell insurance outside the exchange to sell only qualified health plans; or require insurers that sell insurance outside the exchange to comply with all of the requirements applicable to plans sold inside the exchange. 38 But states may want to: prohibit insurers that participate in the exchange from establishing separate affiliates to sell only outside the exchange; prohibit insurers from selling only bronze or catastrophic coverage outside the exchange; or prohibit insurers from using marketing practices or benefit structures intended to attract healthy applicants to plans outside the exchange while discouraging unhealthy applicants. Insurance regulators can monitor grandfathered plans carefully to make sure that they are not lemon dropping that is, encouraging high-cost enrollees to move to the exchange. States that have entered into an interstate compact could require plans (as permitted under the ACA, section 1333) to sell interstate policies only through the exchange. 39 States also could prohibit brokers from collecting higher commissions for plans sold outside the exchange, thereby discouraging them from steering business elsewhere. 40 8

15 Numbers of Participants The Issue Earlier exchanges were troubled by their inability to attain a large enough pool of participants. This was problematic for several reasons. First, if an exchange can offer only a small number of enrollees, it is unlikely to attract enough health insurance plans. Moreover, the insurers it does attract are unlikely to give the exchange a better deal, or perhaps even as good a deal, as what they offer directly. Insurers already active in a particular market generally prefer to sell a single plan to a group, thereby capturing all of its enrollees, rather than to compete with other insurers for individual enrollees. And insurers not already selling their products in that market are unlikely to enter it without being offered the possibility of an attractive customer base. Either way, the exchange has to offer insurers a pool sufficiently large that it cannot be ignored. 41 Second, an exchange must achieve a significant size to be able to create economies of scale and limit administrative costs. Any exchange will have certain fixed expenses, such as personnel, IT, publication, legal, rent, and utilities. Spreading these expenses over a larger population will reduce the costs imposed on each participant. 42 Third, insurers are unlikely to market through an exchange unless they can be assured of enough enrollees to offer a credible insurance-risk pool. Small insurance pools, being potentially volatile and susceptible to destabilization by large claims, are problematic for insurers. According to one expert view, a risk pool of at least 100,000 covered lives would probably be necessary to be viable. 43 An exchange should have a large enough enrollee base to offer several competing insurers credible risk pools. If insurers cover a number of lives outside of the exchange, however, the size of the pool offered by the exchange may be less important. Moreover, once risk-status underwriting is eliminated, a universal insurance-purchase mandate goes into effect, and reinsurance and risk adjustment are implemented, the risk faced by a single plan will be considerably diminished, at which point credibility will be less of an issue. Finally, an exchange must be able to offer a large enough group of enrollees to permit insurers to obtain favorable discounts from providers. 44 Virtually all health insurance plans today are network plans, and providers do not give an insurer discounts unless they believe that the insurer can deliver a significant share of an insurance market. An insurer might currently be able to obtain provider discounts in a new market by signing a major employer in the area, but in an exchange the insurer will have to attract enrollees on an individual basis. In the case of exchanges, size does matter. 9

16 It is important to note that the percentage of a market captured by an exchange is at least as critical as the absolute number of enrollees at least, above some minimal number. An exchange that contains 20 percent to 25 percent of the privately insured participants in a small state is less vulnerable to adverse selection and likely to possess more market clout than an exchange with more enrollees but a smaller market share in a larger state. 45 This is another reason for maximizing participation by employers in the exchange. The ACA As noted earlier, the ACA s subsidy and mandate provisions should encourage large numbers of individuals to purchase insurance through the exchanges. The small-employer tax credit also will create an incentive for very small employers to purchase insurance for their employees through the exchange, although the credit is only available for two years after the exchanges go on line. 46 By contrast, large employers (employing more than 100 people) are initially not allowed to purchase insurance for their employees through the exchange; and until 2016, states can restrict exchange participation to employers with 50 or fewer employees. 47 Beginning in 2017, however, states may open their exchanges to employment groups in excess of 100 employees. 48 As large employer-sponsored groups currently cover 133 million people while small groups covers only 43 million and the nongroup market insures only 17 million, opening up the exchanges to larger groups as soon as possible may be vital to their ultimate success. 49 On the other hand, the pursuit of larger employers will have to be done with care, lest only employers with less-healthy-than-average employees enter the exchanges while employers with healthier enrollees remain self-insured or experiencerated. States also should consider providing state and local government employee coverage through the exchanges, as this could dramatically expand the size of the participant pool. 50 Even prior to 2017, states could establish state and local government exchanges that parallel the ACA exchanges and contract with the same insurers. This would immediately increase market share, and after 2017 the two types of exchanges could be merged. 51 Market Coverage and Structure The Issue Should there be separate risk pools for individuals and small firms or only one risk pool for both? On the one hand, a single risk pool would be larger and less volatile. On the 10

17 other, the risk profiles of group and nongroup pools have heretofore been quite different in many states, and a risk pool combining both could contribute to market instability or regulatory complexity. 52 Whether or not a state should maintain separate individual and small-group exchanges is a related question. A separate SHOP (Small Business Health Options Program) exchange could focus on servicing the needs of small businesses, for example, offering consolidated billing for employee premiums. But a combined exchange could potentially offer enrollees more choices if insurers were required to participate in both markets. Another related issue is the geographic coverage area of the exchange. If a small state offers too small a participant pool to be viable, a regional exchange involving several states may be indicated. Conversely, some states may be so large that a single exchange would be unwieldy. Plan pricing also may need to vary within an exchange so as to take account of variations in the price of health care within different parts of a state or region. In most states, it will make sense to allow HMOs to participate in exchanges that cover only local or regional areas rather than the entire exchange, as this allows for the maximization of enrollee choices and competition. 53 Care may need to be taken, however, to avoid the redlining of areas with lower-income enrollees or racial minorities. Finally, special issues may arise where metropolitan areas span two or more states, or where an individual may live in one state and be employed in another. 54 The ACA The ACA requires insurers to pool all of their individual members in one risk pool and all of their small-employer group members in another, but the law also gives states the prerogative to combine risk pools. 55 Whether or not a state chooses to do so will depend on the factors discussed above. The ACA also allows states to operate separate individual and small-business exchanges, or to merge the two into a single exchange. 56 Although there may be sound reasons for maintaining a separate small-business (SHOP) exchange (see below), combining the exchanges may be necessary, at least in smaller states, to create a large enough market to attract insurers and to reduce the administrative-cost load. The ACA also offers the possibility of subsidiary exchanges within a state, and of regional exchanges, which are discussed further below. 57 In sum, the ACA offers a menu of options by which states may address their particular needs, though the making of sound choices will require considerable thought. 11

18 Choice Without Complexity The Issue One of the major selling points of exchanges is that they have the potential to widen the choice of health plans. 58 Surveys consistently show that a wider choice of plans results in greater enrollee satisfaction. 59 In fact, whatever else can be said about the exchange experience to date, exchanges do have a good track record of increasing the choices available to individual enrollees, particularly in the small-group market. Choices can be offered among different insurers, premium levels, benefit packages, cost-sharing options, and provider networks. Insurers also can offer innovative approaches to plan design or service provision, such as accountable-care organizations, medical homes, or value-based cost-sharing. Too much or the wrong kind of choice can be counterproductive, however, by making insurance shopping more complex. 60 Choice is optimized if it focuses the enrollee s attention on the salient features of the health plans. By contrast, when choice is unstructured it can become overwhelming, resulting in choices that are largely random and may not serve the individual s actual interests. Because exchanges offer the possibility of standardizing plan choices, 61 they can concentrate selection on key features such as price or cost-sharing requirements. They also can eliminate fine print exclusions or exceptions that are usually ignored in the selection process but that can have a devastating effect when a rare and unanticipated condition occurs. Above all, exchanges can offer convenient, fast, and responsive service to consumers, which improves their experience in purchasing and dealing with insurers rather than frustrating or alienating them. The ACA If the premium subsidies described above create a large enough market so that insurers find operating through exchanges to be an attractive proposition, despite the additional requirements involved, exchanges will be able to offer a range of health plan options to their enrollees. The ACA distinguishes among four levels of coverage based on actuarial value (the average percent of medical costs covered by a health plan), with an additional catastrophic policy (Exhibit 2). 62 The bronze-level plan has to provide benefits equivalent to 60 percent of the actuarial value, with the silver level at 70 percent, the gold level at 80 percent, and the platinum level at 90 percent. 63 Catastrophic policies are available only for persons under age 30 or those who cannot otherwise find affordable coverage or would suffer a hardship in buying other coverage. 64 Qualified health plans must agree to 12

19 offer at least one plan at the silver level and at least one at the gold. 65 Nothing in the law prohibits states from requiring plans within (or outside) the exchange from standardizing plans even more for example, by offering only a limited number of deductible options or requiring copayments instead of coinsurance. Indeed, a state could establish a standard plan at each tier to give consumers a benchmark for analysis. 66 Greater standardization might not only aid consumer choice but also deter the structuring of benefit and costsharing packages for risk-selection purposes. 67 Individuals may choose any qualified health plan offered through the exchange, 68 with premium-affordability credits keyed to the cost of the second-lowest-cost silver plan. Nothing in the legislation prohibits a subsidized individual from choosing a more generous plan (other than a catastrophic plan) and paying the difference in cost, or from choosing a less generous plan and paying less. 69 However, the cost-sharing reduction subsidies are available only to a person who chooses a silver-tier plan, as the subsidies are intended to raise the actuarial value of a silver-level plan to a higher level (Exhibit 4). 70 Therefore, it is expected that most subsidized enrollees will choose silver-level plans. If an employer contributes to insurance purchased through the exchange, the employee may enroll in any qualified health plan in the tier of coverage chosen by his or her employer. 71 In this way, the ACA will expand but also channel choices. 13

20 Transparency and Disclosure The Issue Choice is meaningful only if it is informed. One of the potential benefits of exchanges is that they can require participating health plans to fully disclose their terms and conditions, in a comparable form and in plain language, so that enrollees can actually understand what alternatives are available. 72 In this way, they may form realistic expectations regarding their coverage. Exchanges also can facilitate communication with linguistic or cultural minorities. And exchanges can and should offer reliable and objective ratings of the quality and efficiency of available plans. The ACA The ACA contains a host of transparency and disclosure requirements that should significantly expand the amount of information available to health insurance consumers. Section 1001 (which creates 2715 of the Public Health Services Act) requires the HHS secretary, in consultation with the National Association of Insurance Commissioners and others, to develop standards which group health plans (including self-insured plans and grandfathered plans) and health insurance issuers (both inside and outside the exchange) must follow in providing summaries of benefits and coverage explanations. 73 Each plan must provide its summary of benefits and coverage explanation to enrollees, who are entitled to 60 days notice of modification of plan terms, as well as to applicants. These requirements preempt any state standards that require less disclosure. The legislation imposes separate disclosure requirements on plans seeking to sell their policies through an exchange. These include disclosures of: claims-payment policies and practices; financial information; data on enrollment and disenrollment and on claims denials and rating practices; information on cost-sharing for out-of-network coverage and on enrollees rights; and other information as determined appropriate by HHS. 74 Because plans sold outside an exchange must provide these disclosures to state insurance commissioners and to HHS, which must then release the information to the public), this requirement should not be a deterrent to exchange participation. 75 Exchange plans are further required to provide additional information on cost-sharing with respect to specific services from specific providers, if an enrollee requests it. Additional disclosure provisions elsewhere in the ACA require: Health insurance issuers and HHS to post on their Web sites justifications for seemingly unreasonable premium increases